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How to cover Budget deficits is one of the most important questions in monetary and fiscal policy. For thirty years, the Dutch government has used a trick to hide the true extent of the budget deficit. The author of this website doesn’t have enough insight on the politics of other countries to assess whether they have used the same trick.

For thirty years, the Dutch government has used a trick to hide the true extent of the budget deficit

Successive Dutch governments have applied cutbacks for 30 years. But, just like businesses, politicians never considered using the proceeds of those cuts to close the budget deficit. So, the €6 billion that Rutte II had to cut back, was, in reality, a deficit of €200 million per year over the last 30 years. This was not the government’s budget deficit, but probably that of the Lower House (the Dutch Congress). The government’s budget deficit is much bigger.

The Dutch government started to redirect money flows in the middle of the 1980s, but cutbacks only commenced from the mid-1990s. When cash flows are redirected, an organization is promised a grant that, ultimately, works out at 5% less. To cut down, the organization must pay back 5%. This seems to be the same. But, in reality, there is a world of difference.

In 1986, a nursing home for senior citizens was pledged a 10 million guilders grant per year, but only received 9.5 million guilders. As a result, 5% of the employees had to be dismissed and they protested in the Hague.

the cut is twenty times larger than the citizens believe.

In 2014 and 2015, a homecare organization received €1 million per year twice, but had to repay €50,000 twice in April 2015. But, halfway through the grant period, an organization no longer has €100,000 left, as all the money they budgeted for salaries. The only way an organization can come up with €100,000 is by laying off all employees and to close its doors. This leaves employees believing the organization went bankrupt through bad management, and they don’t protest. The next year, the government no longer needs to pay out the €1 million grant. So, in reality, the cut is twenty times larger than the citizens believe.

In October 2017, Rutte III has used the general ledger account for profit and loss to plug a €7 billion deficit. Bearing in mind that the Dutch government’s budget deficit is about twenty times the size, this will be about €140 billion.

Company losses arise because products they cannot sell it. However, the government doesn’t sell anything. So, what caused their budget deficits?

Before 1985, governments never counted their money. They blindly trusted their accounts. If mistakes were made, officials were justly sent home at the end of the year without pay.

Before giro payments became available for companies and citizens to pay their taxes, around 1985, it was impossible to count large amounts of money securely. It didn’t matter how much an official earned, if you told them there was about a hundred billion dollars in cash in a vault and you asked them to count it, they would be very tempted to take some of that money home with them.

Before 1985, governments never counted their money. They blindly trusted their accounts. If mistakes were made, officials were justly sent home at the end of the year without pay.

To solve this problem, governments invented budget financing. With budget financing, an organization acts as if an administrative task is a product which is paid for on completion. For every hour an official works, about $1000 is booked to the budget. In this way, not only is there sufficient budget to cover the official’s salary but also to cover organizational and housing costs.

However, the method introduced a big problem. When a scheduled task isn’t done, the associated budget is not entered into the system. Since it is impossible to book that expected income that has not been received, a budget deficit will emerge, and the government will cut back. Predictably, retrenched officials do not carry out scheduled tasks. So the associated budget is not entered into the accounting, and the budget deficit continues to grow.

If governments only knew how much money they had

Governments close their accounts once every four years. In the Netherlands, this happens in May of the year preceding the elections. In America, this happens in November of the election year.

When closing the accounts, the government discovers a windfall. In May of 2020, the Dutch windfall amounted to approximately € 140 billion. What also happens to be the amount that the government had to cut. So this is not a stroke of luck, but the proceeds of the cuts.

Without a general ledger for profit and loss, the government will use this money to give the rich a tax break and/or to increase the budget of departments.

With a general ledger for profit and loss, the government can use the money to cover the budget deficit.

Alternatively

If you ask someone if they are in debt, they are deeply offended. Still, every homeowner finds it quite normal to have a debt to the bank for thirty years.

Every government in the world has a budget deficit. Some budget deficits are only forty years old. Others are hundreds of years old and still growing. In some cases maybe even a thousand years old.

Virtually every company in the world has a loss or budget deficit. Sometimes that loss is only a few years old. Sometimes that loss or budget deficit is 150 years old.

If the proceeds of the cuts are not high enough to cover the loss or budget deficit. It could take several decades to do that. Sometimes even a few hundred years.

The worst method for a company to close the loss/budget deficit is to employ slaves. Slaves produce low-quality products and keeping slaves causes losses.

The worst method for the government to close its budget deficit is to establish a dictatorship. Dictatorships reduce production and reduce salaries. As a result, companies are left with losses and citizens have no money to pay taxes.

The best way for companies to cover the loss/budget deficit is to include the general ledger for profit and loss and the reserve account in their accounts. Produce and sell high-quality products and pay the highest salary to the employees who make the largest contribution to the turnover.

The best way for the government to close the budget deficit is to include the general ledger for profit and loss and the reserve account in the accounts, and by encouraging companies to do the above so that employees with a good salary can pay high taxes. That government can use, both to improve the general standard of living and to cover their budget deficit.

Budgeting at companies

Since the mid-90s, not only governments, but also businesses are making widespread use of budget financing. Although companies call this budgeting. Budgeting simplifies planning.

Based on the number of hours it takes to create a product, and the number of units a company wants to produce, it is quite simple to calculate how many employees will be required, and how many managers they will need. How many hours support departments such as human resources and the canteen have to reserve for this production. In addition, it is quite simple to calculate how much money will be needed to pay a salary to all employees involved in this production. This budget is linked to the number of hours workers will be working on this product. Thus, there is always enough money available to pay out all the employees involved.

But there is a problem. Budgeting, like budget financing, contains two flaws that cause a loss, and then subsequently increase that loss. This is because budgeting, just like budget financing, was not intended to make planning easier, but to solve an issue with salaries. This method has not been developed by the directors or management. This method was developed and the implementation was coerced by administrative staff and officials at companies and governments.

Before banks made giro payments available to governments, subsidised institutions, companies, workers and consumers in 1985, it wasn’t possible to safely count amounts larger than a few hundred thousand dollars in cash. That meant it wasn’t possible for the government to count tax revenues. It wasn’t possible for large companies to count the yield of large stock issues. Governments and large companies blindly relied on their accounts, and if that didn’t balance, civil servants and administrative staff were sent home without any pay.

Civil servants and administrative staff found a solution for their salary problem

These civil servants and administrative staff had enough of this very quickly and started looking for a solution to their salary problem. The solution, budgeting, or budget financing, had been invented quite often over the last 3000 years. From the second year onwards, all the companies and governments that took advantage of this encountered losses or budget deficits and downsized themselves out of existence.

Our society is no exception. Governments around the world implemented structural cuts on road maintenance in 1999. As a result, all the roads in the world will be in such a bad condition by 2030, it will become impossible to supply supermarkets.

The two flaws:

  1. It is not possible to see if scheduled tasks have been performed. If this is not the case, the budget associated with those hours worked will not be booked.
  2. It seems as if it is possible for department managers to increase their department’s budget by implementing a trick. However, in reality, this trick only increases the budget deficit.

The fact that it is not possible to see whether planned tasks have been carried out, clearly indicates that this procedure could not possibly have been developed by management. Managers would never accept a procedure that doesn’t check whether employees have actually done their work.

The problem with not booking the budget, is that company accounting also doesn’t have a way to check whether expected money (in this case the budget) has in fact been received. If this is not the case, there will be a loss or budget deficit.

To simplify planning, a number of tasks have been pulled apart. So the manager cannot see the consequences of his actions:

The manager is fooled into believing that he can increase the department’s budget

  1. Planning of tasks and calculating how much budget this generates
  2. Calculating how many hours it takes to complete the work
  3. Calculating how many employees are required to work those hours
  4. Calculating how much budget is needed to pay all employees involved

The manager only performs the first task. So it seems like planning extra tasks will lead to an extra budget. The other three tasks are performed by other departments. If it turns out the department doesn’t have enough employees to carry out the planned tasks, additional employees will be appointed.

But the budget needed to pay salaries is linked to the number of hours worked by employees. So if additional working employees are needed, more budget is needed. This extra budget is deducted from the department’s budget.

The manager did not take the appointment of additional staff into account in his planning, and also did not budget for this. So, although the budget is increasing because of the planned extra tasks, the increase in the budget, which is necessary to pay out all the extra employees involved in this production, is greater. So, in the end, only the department’s budget deficit grows.

Meeting the pay roll

Budgeting and budget financing have been invented to ensure there is always enough money to pay employees. But thanks to giro payments and internet banking, that problem was solved decades ago.

Accounting is just a model of reality. Internet banking is a reality. When there is a difference between the accounting balance and the internet banking balance, internet banking is always right.

By giving each department its own bank account and depositing the department’s budget into the bank account, the department has daily access to accurate information as to the size of the budget.

In combination with a general ledger for profit and loss, to gain insight into losses, and a reserve account to absorb losses, the department can ensure that it always has sufficient money to pay its employees.

Increasing salaries

Another big problem is that budgeting makes it impossible to increase salaries. Planning is very easy because employees have a constant salary, which is only adjusted for inflation. If salary increase would become possible based on other factors, it would no longer be possible to calculate how much money is needed for salaries based on the number of production hours.

The fact that it is not possible to increase salaries is not only a problem for employees, but for companies too. There are two ways companies can increase their sales and profits. By increasing the number of employees, or by delivering a higher quality of product. Although the increase in turnover is the same in both cases, the second method generally yields more profit.

But employees are not willing to learn the skills needed to increase the quality of their work, as long as they don’t see the result of their efforts reflected in their paycheck.

As a result of hourly pay, there are certain activities that can no longer be carried out today.

At the end of the 1970s, there were thousands of 100-meter-high chimneys in use by factories in the Netherlands. From 1980 onwards, they all suddenly disappeared. This was not because environmental requirements had been tightened, but because hourly wages had been introduced.

These chimneys had to be cleaned once a year. There were very few chimney sweeps that dared climbing up with a ladder on the outside of the chimney, then climbing down on the inside to clean the chimney.

Based on a combination of performance pay and the law of supply and demand, these people earned 1000 guilders per day in 1979. Then, hourly pay was introduced. In 1980, the companies where they worked were still paid 1000 guilders per day. But the chimney sweeps only received 80 guilders per day based on hourly wages. No one was willing to risk their lives for that meager amount, making it impossible to realize the work.

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